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For 72 years,
the building at the intersection of Bullion
Boulevard and Gold
Vault Road in Fort Knox,
Kentucky has symbolized the financial
strength of the United
States of America. The United States Bullion
Depository, better known as FortKnox, is said to
contain 147.3 million troy ounces of gold, over half the nation’s total
reported gold bullion holdings of 261.5 million troy ounces. The remaining
114 million ounces are said to be stored at the Denver
and Philadelphia Mints, the West Point Bullion Depository, and the San
Francisco Assay Office. Assuming a price of $1,000 / ounce, the
nation’s gold is worth $261.5 billion. If the metal is actually there,
it represents the largest sovereign stockpile of gold bullion in the world.

However, the
gold holdings of the U.S.
have not been audited in more than 50 years. One reason given for the lack of
an audit is that it would be “too expensive” to conduct one. An
audit would cost a few million dollars, at most, so using cost as a reason
for not performing it strains belief when placed in the context of the
country’s Fiscal Year 2009 deficit of $2,000,000,000,000.00+, and
federal debt of $11,600,000,000,000.00+. It is curious that one of the few
places within the government where costs appear to be of concern relates to
an audit of the one, true monetary asset possessed by the American people.

Even the
Treasury Department’s clandestine $50 billion Exchange Stabilization
Fund (ESF), which is only one-fifth the value of America’s
reported gold holdings, undergoes an annual audit. For fiscal year 2008, this
audit was conducted by KPMG, a well-known, independent CPA firm. KPMG’s
2008 ESF audit uncovered “significant deficiencies,”
“material weaknesses,” a “weak control environment,”
and “several control deficiencies.” If a Treasury organization
subject to annual audits could fail its recent exam as broadly as that, what
are we to assume about the safety and security of the people’s gold
supply, which, like the national money geyser, the Federal Reserve Bank is
never audited? And if the ESF is audited each year, what legitimate rationale
can there be for not auditing the nation’s gold supply? Something
isn’t adding up. In such a situation, inferential analysis can provide
value, which you will see as this article progresses.

The financial
events of the past year demonstrate beyond any reasonable doubt that the
United States government is now of Wall Street, by Wall Street and for Wall
Street, in general, and of, by and for Goldman Sachs, in particular. This
inversion of power and privilege was partly brought about by an explosion in
government debt. The government relies on Wall Street to roll over existing
and sell new debt issues. Debt is now hitting the market like a tidal wave,
given the country’s record-shattering deficits and costly Wall Street
bailouts. If the paper cannot be sold at expected interest rates, then the
debt-addicted system will go into seizure.

The radical
empowerment and enrichment of Wall Street has transformed our democracy into
an aristocracy, making the debt dealers the nation’s new royalty, the
government its feudal barons, and the citizens mere serfs who endlessly sweat
and toil in fields of debt weeds that grow so fast they can never, ever be
harvested.

Predictably, in
such an aristocracy, an iron curtain of secrecy and non-transparency has
descended across the land, separating Wall Street and government on one side,
and the people on the other. While the people are deluged with generally
useless government data that numbs their minds (as an example, a recent
search of the Federal Reserve web site for “United States government
2008 financial statement” produced an unmanageable avalanche of 520,817
entries), simple, truly important information, such as audited gold reserve
statistics, accurate monetary aggregates like M3, the names of
taxpayer-funded TARP, TALF and other bailout recipients, and audited Federal
Reserve Bank financials, is kept a state secret, using the hackneyed excuse
that “it’s for the people’s good.” Autocracies have
always tried to convince the masses that ignorance is freedom, and that
knowledge is enslavement.

The colossal
conflict of interest that has developed between government -Wall Street axis,
which hides behind the iron curtain of secrecy, and the citizens who stand in
front of it now requires the people to-second guess everything they are told,
for their own protection. The financial interests of a government controlled
by avaricious, bonus-focused financiers are directly opposed to those of the
people, since government revenues come directly from the people. What the
government gains, the people lose, in the zero sum game of government finance.
Which brings us to a more detailed examination of the people’s gold.

For the past
28.5 years, from 1980 through June, 2009, the United
States government’s gold holdings have
been reported as being essentially constant, at around 262 million ounces. Gold
hit a nominal price high of $850.00 per ounce in January, 1980, when a severe
recession was developing. (Compared to today, 1980 looks like the bubbliest
part of the Roaring 1920s.) Inflation-adjusted (using government CPI figures,
which are hotly debated), that price would now exceed $2,400 per ounce,
whereas the current market price is only $950.00 per ounce. As GATA (www.gata.org)
has demonstrated beyond any doubt, U.S. Treasury and Federal Reserve
officials actively monitor and seek to suppress the gold price, because a
rising price can signal fiscal, economic and/or fiat currency distress,
things that are bad for markets and embarrassing for governments.
(GATA’s work in this area has been nothing short of heroic, and is well
worth examining in detail.) For gold to be selling today at only 40% of its
1980 inflation-adjusted price, in the midst of the worst financial crisis in
the nation’s history, is curious.

While the United
States gold supply is said to be constant,
the holdings of many other nations, with the general exception of export-rich
Asian countries, has declined, oftentimes radically. According to the World
Gold Council, Canada’s gold reserves are down 99.5% from 1980 to today;
Australia’s are down 68%; Austria’s are down 57%; Belgium’s
are down 79%; The Netherlands’ are down 55%; Portugal’s are down
45%; Spain’s are down 38%; Norway’s are down 100%; Sweden’s
are down 30%; the United Kingdom’s are down 47%; South Africa’s
are down 67%; Argentina’s are down 60%; Mexico’s are down 92%;
Brazil’s are down 41%; and the European Central Bank’s
are down 33% (since 1999, its first reporting year). Even Switzerland,
a country with a long-term affinity for gold, has slashed its reserves by
60%. Official world gold holdings (held by all nations plus international
financial organizations such as the BIS, the IMF and the ECB) are down 17%,
despite large gold reserve increases by countries such as China,
Taiwan, India
and Russia
that moderated the larger percentage declines in the many nations noted
above.

However, the United
States’ gold holdings are said to be
down a mere 1% during this 28.5 year period, even though the country’s
debt has surged from $712 billion to $11.6 trillion and its unfunded
contingent liabilities have exploded to more than $90,000,000,000,000.00. So
while other countries with far less debt and far better balance sheets
slashed their gold holdings to raise money for various government purposes,
the United States,
with its surging debt and staggering deficits did not. Inconsistencies like
this are worth exploring; sometimes they represent golden opportunities.

If the United
States were a corporation or an individual, it would be considered completely
non-credit worthy given its disastrous finances. The U.S.A.
would not qualify for an Exxon credit card, let alone for the trillions of
dollars it is borrowing in the global bond market. One way those in financial
distress can obtain credit is to post bona fide collateral. Some consider a
country’s future tax receipts to be a form of collateral, but in the
case of the United States, this is not so, because according to the
Congressional Budget Office, the country will run multi-hundred billion
dollar annual deficits for the next 70 years and beyond. So according to the
CBO, the nation’s future tax revenues are already spent.
Hypothetically, the nation could sell its national parks, or its mineral
and/or energy rights, but this would be a radical, last ditch solution that
has not even been publicly debated. For all practical purposes, the
country’s only true collateral is the gold in Fort Knox and related
depositories.

Those who are
lending the United States money, by buying its Treasuries and other debt
instruments, must be competent capitalists. If they have billions to lend,
they obviously know how to earn and manage money. These lenders simply cannot
be oblivious to America’s financial situation, and must certainly
understand the concept of collateral.

As of July 17,
2009, the nation’s top few bullion banks were short 19.5 million ounces
of gold on the futures exchanges. This highly concentrated short position was
reportedly held by 4 or fewer major money-center banks. At a gold price that
day of roughly $940.00 / ounce, the dollar value of this short position was
$1,833,000,000.00, or $1.83 billion. A mere $10.00 / ounce decline in the
price of gold would give the banks a profit of $195,000,000.00. A price
increase of the same amount would produce a loss of $195,000,000.00, in other
words, serious money in either direction. Given the financial crisis and the
myriad problems affecting the banks, such as toxic derivatives and
non-performing loans, why they would risk $1.8 billion on naked gold shorts
in the world’s most volatile financial casino, the commodities and
precious metals futures market, is difficult to understand, unless they know
things or have other advantages that the rest of the marketplace does not.

In inferential
analysis, we look at what might appear to be unrelated facts to see if, in
reality, there might be connecting strands among them. These connections help
explain situations that otherwise defy logic. Even though isolated facts
might be mute and uninteresting, they often tell an important story when
combined. Sometimes, conjoined facts sing like canaries. We believe events in
the gold market are trying to tell a tale, and we posit three general
scenarios relating to the nation’s gold reserves: Fort Knox, Fort Hocks
and Fort Shocks.

FORT KNOX. In
this scenario, the citizens of the United States own the exact amount of gold
that is reported by the Treasury Department and the Federal Reserve: 261.5
million ounces. The gold supply is owned free and clear
by the United States and its citizens. It is not swapped, hypothecated,
pledged, exchanged, leased, sold, claimed, conditionally offered or in any
other way compromised with respect to ownership. A full audit of the gold
would prove that it exists strictly in bullion form (with no “paper
bullion” or third party warehouse receipts) in the stated depositories.
Based on recent fiscal, financial, monetary and economic developments, we
view this scenario as possible, but extremely unlikely.

FORT HOCKS: In
this scenario, an audit will show that a significant portion of the
citizens’ gold has been mobilized by the Treasury and / or the Federal
Reserve; in other words, that it has been hocked at
the global financial system’s pawn shop. There are many possible means
by which this could have happened; we list only a few.

1.)The gold backstops favored bullion
banks’ trading activities: In
this scenario, the government has contracted with a small number of favored
bullion banks to have them manipulate the gold price so it remains within
federal targets. They would achieve this by large-scale shorting and related
market-intervention techniques. This helps explain why a small number of
major NYC money center banks are currently short 19.5 million ounces of gold,
which would otherwise be a reckless, irresponsible gamble with shareholder
assets, and a possible violation of the banks’ fiduciary duty,
particularly in the current financial crisis. The banks have been guaranteed
that if an exogenous event increases the gold price, their short positions
will be “backstopped” by U.S. gold reserves. In other words, if a
major bank failure, terrorist event, natural catastrophe, war or other major
domestic or international event drives the gold price higher, exposing the
banks to trading losses on their shorts, then the government will supply them
with the bullion needed to close out their positions and cancel their losses.
This is entirely consistent with the recent bailouts, where the government
has purchased the banks’ toxic assets with taxpayer money, sterilizing
their losses at citizen expense.

This scenario creates a money machine for the bullion banks. They can
short gold with a government guarantee against losses, and can cover at lower
prices, after they have driven the longs out of their positions. Operating
like this, they can profit on up and down price moves, since they will create
them. As noted above, the profits generated from these types of “bear
raids” and subsequent “bull covers” can be enormous.
($195,000,000.00 for every $10.00 price decline given the bullion banks’
current short position.) The banks can launch these raids repeatedly at
virtually no risk, since dumping large amounts of gold onto the futures
market creates predictable price declines. However, if the government needs
to backstop the banks (due to trades gone wrong that are backstopped and
insured), then the gold must come from the United States’ gold reserve.
There have been hundreds of $10.00 and dozens of $50 – 100.00+ price
declines during the current bull market, indicating that the bullion banks
have potentially made tens of billions of dollars’ worth of profits,
given that they have consistently been short the gold market during these
price episodes. If they have not been profiting from these short positions,
why would they have continued to hold them for years, and continue to hold
them today?One further point:
since futures represent a zero-sum game, where every profit means an
identical loss for another party, any bank gains have come at the direct
expense of other investors who have been losing in a rigged, corrupt casino that
is riddled with fraud.

2.)Leasing for profit: In this scenario, the government has leased all or a portion of the
nation’s gold to earn interest on its value, or simply to mobilize the
gold as a way for bullion banks to keep the price within targets. However, in
this case there is no government “backstop” or guarantee if the
bullion banks’ shorts go bad; the banks are responsible for their own
trades. In this case, the government assumes counterparty risk, because if
the bullion banks’ naked shorting operations produce losses, then the
banks may be unable to return the borrowed gold to the government. This is a
Las Vegas gamble on the part of the bullion banks and the government.
However, if the government is willing to lend large quantities of gold to the
bullion banks, this will give the banks enormous leverage in the marketplace,
and the ability to drive down the price of gold, thereby generating
significant profits at the longs’ expense. The banks are fully exposed
to the risk that exogenous events could increase the price of gold, creating
losses on their short positions. However, if the gold price does increase,
the banks might be able to “double down” by borrowing additional
bullion from the government, in an ongoing effort to crush the price. With
potentially tens of millions ounces at their disposal from the United States,
plus additional gold possibly available from other central banks, producers
and operators of the new Exchange Traded Funds, the shorts could cause
serious price damage, though they would have to take risks to win. As in
scenario #1 above, the profits from such trading operations are potentially
huge. Leasing has existed in the market for years, with gold supplied by
central banks and miners. Much of this hedging activity has been curtailed
with respect to miners, but due to the culture of secrecy and
non-transparency at central banks, their exact activities are an unreported
state secret and a mystery. Recent government rhetoric about transparency has
clearly been disingenuous.

3.)The government is actively trading gold. In this scenario, the government is trading gold
on the futures exchanges, for profit and to control the price, either
directly (under a secret trading name) or indirectly (using proxies), and
either on-shore or offshore. This activity could be conducted by the Working
Group on Financial Markets or some other government-funded financial entity.
Any trading losses could be settled by delivering to the exchange(s) gold
from the United States’ official reserve.

FORT SHOCKS: In
this general scenario, and audit would reveal that
America’s gold is gone, either in whole, or in part. It might have been
sold outright, pledged to counterparties, or otherwise distributed. The
belief that there are millions of ounces of gold in Ft. Knox would therefore
be a great American delusion. America’s gold could have been sold or
exchanged in several ways. Here are a few:

1)Foreign purchasers of U.S. Treasury and/or
Agency debt simultaneously demanded the right to purchase U.S. gold, to
offset currency and other risks associated with the debt. In this scenario, China, Japan and/or other
governments demanded and won the right to purchase “x” ounces of
United States gold for every “y” dollars of United States debt.
This would compensate the debt purchasers for likely dollar devaluation given
current fiscal deficits and fast-growing national indebtedness. This would
also provide debt purchasers with some insurance against default, since
default would most likely result in a rising gold price. Since the U.S.
economy is now completely debt-based, maintaining an orderly debt market is
the nation’s top fiscal and financial priority. Selling national gold
to keep the debt market functioning smoothly would be considered by
authorities a small price to pay.

2)Backstopping guarantees were invoked. In this scenario, recent rallies in the gold
market caught the bullion banks short, and enabled them to receive gold from
the government as part of the backstopping guarantees they negotiated. This
gold was used by the banks to settle their short positions and cover losses.
This gold would be sold into the open market, and never returned to the
official U.S. reserve.

3)Government sold gold to raise cash. Over the 50 year non-audit period, government
needed money and did not want to issue additional debt at the time.
Therefore, it sold gold into the market to raise funds, just as numerous
other central banks have done in recent years.

4)Gold leases with a “cash
settlement” option. In this case, the
government leased gold to third parties, such as bullion banks, with a
“cash settlement” option, as opposed to demanding that the gold
be returned at the termination of the leases. For whatever reasons, the
bullion banks exercised the cash settlement option, and did not return the
borrowed gold. In this scenario, the gold would never be returned to the
official U.S. reserve.

5)A portion of the gold supply has been stolen,
or has otherwise disappeared. The
Royal Mint of Canada announced in June, 2009 that 17,500 ounces of Mint gold
had been lost or stolen. This disappearance was confirmed during an audit of
the Mint by Deloitte & Touche, CPAs, under the
direction of the Auditor General of Canada. (If Canada audits its gold, why
doesn’t the United States?) Regarding security, the Mint’s web
site states: “The rigour of our production
standards is equalled by the stringency of our
security protocols. The refinery is a restricted environment controlled by
security personnel supported by state-of-the-art surveillance
technology.” If it could happen there, could it not happen here,
particularly over a period of 50 years? This
is exactly why you conduct audits.

6)All or a portion of the gold simply cannot be
accounted for. In this scenario, the
paper trail for the nation’s gold fails, with errors, gaps and
inconsistencies, and no one even begins to know how to re-create it. If gold
is missing, no one knows when it went so or how to find it, since there are
so many years (50) to account for. This would be similar to the $50+ billion
in cash that is missing in Iraq. That money was stolen recently, and even so,
no one can account for or find it.

Implications. If the Fort Knox scenario prevails, it is a
non-event. Since there is no change in the nation’s gold supply, the
status quo is maintained.

If the Fort
Hocks scenario prevails, then the government has orchestrated a market
manipulation scandal that is equivalent in nature to Enron, Worldcom, Madoff and all the other frauds in the sordid
panoply, but that dwarfs them in dollar value and sheer, outright dishonesty.
The revelation that a first world government had deliberately engineered such
a market manipulation, resulting in tens of billions of losses to honest
investors, while simultaneously producing epic, illicit profits for favored
inside traders would be a shock to all markets and investors. An insider
trading scandal of such alarming, unprecedented proportions would constitute
an inexcusable abuse of power, and represent fraud and corruption on a third
world scale. It would not just damage the reputations of America’s
monetary institutions, it would destroy them.

If the Fort
Shocks scenario prevails, it would have severe implications for the dollar,
because it would demonstrate that the United States’ financials are
deliberately distorted for monetary and political reasons. Even though the
dollar amount of this scandal ($262 billion) would be miniscule in comparison
with the government’s 2009 deficit ($2 trillion), debt ($11.6 trillion)
and combined debt and unfunded contingent liabilities ($90 trillion), it
might serve as a tipping point, where faith in America’s finances and
confidence in its government are lost. If America’s gold reserve
position is a lie, then what else has been distorted, and where, if anywhere,
is the truth?

Keep in mind
that the fiscal year, 2009 deficit is currently running at $5,479,000,000.00
per DAY. So even if the Fort Knox scenario prevails and the 261.5 million
ounces of citizen gold are safe and accounted for, their dollar value is
completely destroyed by only 47 days’ worth of deficits.
America’s gold cannot protect it from the national wealth wipeout that
intensifies each and every day.

The United
States could put these concerns to rest simply by auditing the gold and
publicly reporting the findings. And yet, despite repeated attempts by such
organizations as GATA to get them to do that, they refuse. Why? Is it because
Treasury and Federal Reserve officials know that the results would be
explosive, and similar to what has been outlined in the Fort Hocks and Fort
Shocks scenarios above?

If it becomes
known that the United States has surreptitiously hocked or sold its
citizens’ gold, the price per ounce would most likely explode.
Conceivably, gold would have its first $500 up day as people threw in the
towel on other forms of “money” they could no longer understand
or trust.

While inferential analysis is not used to prove a
hypothesis (there are other forms of analysis that can offer proofs, when the
facts exist to create them), it can be extremely useful in pointing to the
truth when important facts about a situation are not available or revealed.
Even though this report does not prove the hypothesis that the United
States’ gold position is compromised, perhaps radically, the
risk/reward dynamics of this situation are so interesting that we believe it
is worth paying attention to the opportunity they provide.

Stewart Dougherty is a specialist in inferential analysis, the practice of identifying
patterns and trends from specific, contemporary events, and then extrapolating
their likely effects upon the future.